Why Is Rolls Royce Stock So Cheap? If you’ve ever questioned why Rolls Royce stock is so inexpensive, you’re not the only one. Many investors have considered Rolls Royce an attractive way to play the automotive sector, one of the world’s oldest auto manufacturers. Still, with the stock down more than 35% over the past 12 months, some have grown weary of the company’s prospects, especially compared to competitor Bentley Motors whose stock price has jumped nearly 50% over the same period. So, what’s happening with Rolls Royce, and how can investors play the company?
The value of Rolls Royce stock has taken a massive hit in recent years, leaving investors scratching their heads and wondering why the brand can’t perform better. Here are a few things you should know about Rolls Royce stock that might help you understand what’s happening with the company.
History
Rolls-Royce has a long and illustrious history. The company was founded in 1904 by Sir Henry Royce and Charles Rolls. Together, they created some of the most iconic cars ever made. The Rolls-Royce Silver Ghost was produced from 1906-1925 and is considered one of the most important cars in the company’s history. With a price tag that would cost more than $8,000 in today’s money, it was among the most costly automobiles of its day.
In 1931, the company was forced to declare bankruptcy due to the Great Depression. It was bought by Sir Henry Jowett, who turned it around and made it profitable again. However, the business suffered again after World War II and was finally acquired by Vickers in 1980. In 1998, BMW acquired the company from Vickers for $570 million.
In 1999, Rolls-Royce Motor Cars were spun off into an independent entity with BMW as the major shareholder. Then, in 2003, Volkswagen took control of this entity after acquiring all shares not held by BMW for about £340 million. Since 2003, Volkswagen has had majority ownership (more than 50%) of Rolls-Royce Motor Cars Limited and 100% of RRR Holdings Limited (which produces automotive components).
China Concerns
Why is Rolls Royce stock so cheap? It all has to do with China. The country is Rolls Royce’s largest market, and concerns about the country’s economy have led to a decrease in demand for luxury goods.
This, combined with some production issues, has caused the stock price to drop. This is not the only thing that is occurring right now. These factors may shortly lead to a rebound in shares if production gets back on track and Chinese economic indicators improve.
One way to invest in the company is through ETFs such as VanEck Vectors Global Alternative Energy ETF (NYSEMKT: GEX), which holds several alternative energy stocks, including Tesla (TSLA) and TransAlta Renewables (OTC: TRSWF). GEX stores 4% of its assets in shares of Rolls Royce.
Growth Prospects
Rolls-Royce Holdings plc (RR.L) is a British multinational engineering company incorporated in February 2011 that produces power systems for use in the aerospace and defense industries. The company reported full-year solid results in 2020, with adjusted operating profit more than tripling to £2.2 billion and sales climbing 10% to £15.4 billion. New engine production also rose by 40%.
In September 2017, the US Department of Defense announced it would award Rolls-Royce $8.3 billion in new contracts. In December 2018, the Defense Security Cooperation Agency awarded RR£50 million worth of new contracts to supply an unspecified number of T700 turboprop engines for helicopters. The United States Military has been one of its biggest customers; as early as 2010, RR had earned over $1 billion from military sales to America alone. It has also enjoyed some success within the civil market, powering aircraft such as Emirates’ A380s and Qatar Airways’ A350s.
Despite all this good news, the company’s shares have taken a beating on London’s stock exchange since 2016. There are two potential causes for this: concerns about losses under strict Brexit rules or companies like Airbus SE (AIRS) using their turbine technology instead of buying Rolls-Royce models. Shares have fallen 36% in the last 12 months alone due to these factors, which could lead to long-term problems for investors if they don’t find other markets outside of aerospace soon enough.
Earnings miss in Q1 2017
Rolls-Royce Holdings plc (RYCEY) stock has been cheap for a while now. After missing earnings estimates in Q1 2017, the store took another hit. Is it that horrible, though? Let’s take a closer look.
The company reported an adjusted loss of £103 million ($134 million), with a profit of £111 million in the previous year. This was mainly due to lower demand for its engines, which power everything from commercial jets to submarines. Overall, revenue fell 4% to £2.3 billion. However, cost-cutting measures partially offset this, which helped save £57 million.
So why is the stock still down? Investors are concerned about future profits because Rolls-Royce’s order book suggests moderate order growth. In other words, these investors are not confident that the recent cuts will keep up with falling demand and that there may be more layoffs if things don’t improve soon. There are reasons to believe things could turn around faster.
The Rolls Royce company said it is still on track to increase its underlying profit margins by 7% this year, and analysts expect engine sales to pick up again later this year or early next year. Investors may want to watch the situation unfold before they entirely sell out of their positions.
A recent selloff
Rolls-Royce Holdings PLC (RR.LN) shares have been under pressure recently, falling more than 20% since early February. There are many causes for the selloff, but the main one is that the corporation is experiencing some significant challenges.
Firstly, there is the weak global economy, which is weighing on demand for new aircraft.
Secondly, Rolls-Royce is facing increasing competition from General Electric Co. (GE) and United Technologies Corp. (UTX), which now offer engines with similar technology as Rolls-Royce.
And thirdly, the company has yet to launch any significant innovations in recent years, meaning it lacks an edge over competitors like GE and Pratt & Whitney (UTX).
The key takeaway is that investors need to be aware of these risks when buying RR stock because if things don’t improve soon, we could see another significant selloff at some point in the future. On the other hand, Rolls-Royce offers many attractive investment opportunities despite its current challenges.
For example, it has a relatively high dividend yield of 4.4%, and its share price is still substantially higher than it was three years ago due to growing sales volumes and profits following a period of cost-cutting. To put it another way, this would seem to be a reasonable time for long-term investors to buy RR stock because they may not have to wait long before they start seeing dividends pay off or the share price rises significantly again, thanks to renewed confidence in the business model due to solid performance by new products.
Value investors think this could be a good entry point.
Many value investors believe that the stock of Rolls-Royce Holdings plc (LON: RR) (OTCMKTS: RYCEY) is undervalued. The firm’s stock price has dropped significantly in recent years and trades at the forward P/E of just 7.5. Long-term investors may find this to be a compelling entry opportunity.
To understand the stock’s upside potential, consider the company’s free cash flow per share. One may get cash flows per share by multiplying cash flows by the total number of outstanding shares. In 2017, the company generated $2.92 billion in free cash flow and had 332 million shares outstanding; this means its free cash flow per share was $7.78 (calculated as $2.92 billion divided by 332 million). By comparison, analysts’ consensus estimate for 2018 earnings is about 3.10 euros or about $3.59 per share.
At the current market price of 515 pence per share, you’re paying only about seven times earnings for Rolls-Royce Holdings plc (LON: RR) (OTCMKTS: RYCEY). If we use analysts’ consensus estimate as a proxy for what the company will earn over the next 12 months, then you’re paying less than six times earnings.
Conclusion
If you’re wondering why is Rolls Royce stock so cheap, here’s what you need to know. Sales for the corporation fell by 95% in the first half of 2020 due to the epidemic. However, there are some silver linings. The company has cut costs and is now debt-free. It also has a strong order book, with over £15 billion in orders already in place for 2021. Despite the organization’s difficulties, things are gradually returning to normal.
One thought on “Why Is Rolls Royce Stock So Cheap? – Here’s What You Need to Know in 2022”